Flipping Myntra

E-Commerce is close to my heart, and I have been asked many times in the recent past what I think of Flipkart buying Myntra. And really, the one thing I feel is dread. I really do like both Flipkart and Myntra. Both have good products, reliable service, convenient sites and great customer support. I have been frequent purchasers from both; everything from shoes to mobile phones. Both are businesses I hope will survive, as I hope e-commerce in general will.

Why the dread, then?

Its because I don't understand the deal, the reason FlipKart was willing to shell out a generous chunk of change to buy a good but not great brand. And what it seems to portend for the etailing category as a whole. People have pointed me to Facebook's purchase of Instagram or WhatsApp as the template, but I see more Compaq than WhatsApp in this deal. Instagram and WhatsApp were both global leaders, dominant in markets that Facebook was lagging in but hoping to penetrate. Myntra offers FlipKart neither - not a dominant brand, nor a new customer base, not even a category that cannot be organically established at a much smaller cost equally quickly. HP bought Compaq more in an attempt to consolidate in a falling market that continues to fall, where growth in marketshare could only be achieved with these kinds of stunts - and destroyed considerable value in the process. This one has the same smell. Will the combined entity have better fundamentals - more profitable, more competitive, more attractive to customers? I have a hard time seeing how.

I find it hard to believe this is a reaction to Amazon, which has never done much in apparel globally. The most cynical explanation is that this is an accounting trick - allowing the venture funds that own so much of each company to book a big exit and bolster their own record while basically transferring money from one pocket to another. If youre a little less cynical, you will think of synergies, of marketshare, of category dominance and jargon like that; all valid stuff but very short on specifics. And forget about the fact that both companies are burning money like petrol in a Ferrari.

Everyone has heard of the Amazon lesson - grow big fast. What people forget that Amazon's enormous hunger for money was to power its investments. It did not spend anything significant on advertising in its first few years, and even now mas a relatively muted marketing drive. Instead, it spends on servers, on technology, on warehouses, on supply chains and on people - assets that have helped it grow to a $60bn business. It is also the sole e-retail venture in the top ten that is not an offshoot of a retail chain while other aggressive cash burners like Boo.com, Buy.com or Pets.com flamed out entirely or survive as shadows of their former glory. Some digging into Amazon's balance sheet seems to indicate that it is operational quite profitable. Amazon offers nothing for free - extra conveniences are either charged for, or you are locked into a subscription. All that extra money goes into investments such as cloud or Kindle or drones delivering packages, not customer subsidies.

When I heading FutureBazaar in 2006-7, we soon realised that the natural, profitable size of this business was about Rs 65 crore a year based on the number of customers we could attract who would purchase reasonable amounts and pay for things like shipping. We, however, wanted to excite venture capital, raise money and become Amazon - this 'excitement' number was Rs 300 crore a year - not much money was available below this. The remaining sales could not come from profitable customers; we could only generate this kind of topline by impossible discounts, sweetheart delivery terms and that biggest money-burner of all - cash on delivery. And we could only do this if there was a steady tap of money flowing in on the other side. Its a kind of reverse pyramid - customers are doled out liberal subsidies as the companies engage in a beggar-thy-neighbour valuation game. Its good strategy, and worked well for Flipkart, Jabong, Myntra et al till the really big boys came along. Its hard to see how beggar-my-neighbour will succeed against Amazon, or the inevitable entry of WalMart.com and Target.com. Or even a Reliance Retail, if it chooses to do e-commerce correctly and with enough patience.

Venture money backing these businesses are, of course, not fools; they eventually intend to cash out on the growth and marketshare these companies represent either by reversing the pyramid again and doing an IPO, or finding an invester with far deeper pockets such as, say, BlackRock. In my experience, also, many venture capitalists just believe that scale will eventually become profitable; the details of the business dont always interest them. In FutureBazaar, I was pushed repeatedly to offer incredible delivery timelines or cash on delivery - a business model patently financially unviable - because it would lead to growth that they were sure they could encash. There was no concern about how that growth could be sustained, and of course the money that should otherwise have gone into building capacity - warehouse, supply chains and the like that bosltered the unique proposition of e-commerce but had only long term returns - those were not valued much. Remember, the average venture capital investor has an attention span of between three and seven years by which time he has either made money on you or abandoned you; the long long long term does not really incentivise him.

Think of what Amazon is known for. Its e-commerce platform has spun off new directions in cloud and analytics, its warehouses represent an entirely new approach to real time delivery; its ad campaigns are hardly memorable. Unlike Pepsi, which sells an idea, Amazon's success lies in massive investments in a new way to source and supply. Flipkart's success is also built on replicating some of this in India - they built the warehouses and delivery infrastructure that Futurebazaar wanted to build while it was the leader - but the bulk of its humungous money chest goes not into world-beating (or Amazon-beating) innovation but into customer subsidies.

Back to the deal. I fear its a deal for the venture capitalists, not for fundamental business reasons. And for what it says about Indian e-commerce in general. India has gone through three waves of e-commerce plays so far - the early, heady Rediff Shopping, Fabmart and Bazee days, the later, equally promising world of Indiaplaza, EBay and FutureBazaar and now the glory days of Flipkart, Jabong and Myntra. The thing to note is - every player in each previous wave is extinct or nearly so - that points strongly to fundamental business model flaws rather than poor execution, which would have led to some losers and some winners, not the extinction of an entire wave. I fear we are in the same situation again - the wave is bigger than the one before, but it is about to crash. Unfortunately, customers like us who genuinely find e-commerce useful will be left stranded, a market of demand without supply.